Cash Rich Tech Companies Becoming Banks?

from the here,-borrow-some-money dept

In one of my posts about the financial crisis, I noted two important things: that if banks really did stop lending money, there would be opportunities for others to start lending (though, the question was whether or not widespread fear would stop that process) and that non-bank businesses might start adjusting their own "loans" in the form of changing the terms on deals. Of course, what we were talking about there was businesses decreasing the amount of credit they offer customers by doing things like shrinking the terms on a deal from payable at net 60 days to net 30 days.

What we didn't necessarily count on was that cash rich tech companies might go in the other direction -- and look to fill that opportunity to lend where banks had failed. Apparently vendor financing is suddenly a very hot business, with various tech companies suddenly finding a lot more interest in their leasing and vendor financing programs. Effectively, what's happening is that these tech firms with money are taking over the role of lenders from the banks. Assuming the loan risks are low, this could actually work out quite well for these tech companies in the long run. It's at least something worth watching. Valleywag worries that these sorts of deals almost always end badly -- but that's not necessarily true. It really depends on how the programs are run, and how well they measure the risk associated with certain companies.

If memory serves me correclty

In our own Alameda County, a small tech company (later purchased by Lucent) called Ascend Communications (ok, not so small) thrived on lending to startup ISP's. Not known by many, but I am the original founder of Florida's largest ISP (at the time) and if it was not for Ascend Communications providing financing where banks would not the company I founded would not have grown anywhere near the size it was when I finally sold it.

mini banks

We just did an article on the bank meltdown and what didn't make the article was a general feeling that banks that DO have money are holding on to it. For companies to move items- they really have to do something while the moneylenders go through their frightened state of being moneyholders.
Yeah, there is opportunity. It's a vacuum.

Business to Business loans that don't involve banks or insurance companies aren't unheard of - though they might be considered rare.

It is good to see that this kind of thing gets more attention.

My own company is thinking about getting into this business. We are largely cash based business. We don't even have a single client who uses credit card (strange eh?). We have never offered any more than net 15 to a client, and they have to be a good one. And the company itself has no debt.

So we have cash laying around. We are thinking about loaning off 5% of that cash on hand through some kind of proxy service just to see how it does.

Our business model is evolving too

As a high tech mfg we have found a new niche. As credit is tight our customers are experiencing a cash flow crunch.

So, we expanded into an order fulfillment center.
Now we build, hold the inventory, and ship directly to the final customers. IWe don't bill out until our customer is able to do so as well. This eliminates their need to borrow for the float between stocking and shipping.

The old way we would ship in bulk and our customer would borrow to pay for inventory. Now they are relived of that burden, we become more integrated with them, and thus, more difficult to replace. We even make a little more for the added service!

Trade Credit

"Business to Business loans that don't involve banks or insurance companies aren't unheard of - though they might be considered rare."

Actually short term trade credit is a huge factor in the economy. In the business I work for the trade credit we extend to customers is twice the amount we owe the bank. By extending credit to customers, who may be less credit worthy than we are, we make more money.

A manufacturer should only be offering financing credit if they can realize returns greater than their own cost of capital.